This guide is an outline of the purchase process of residential property in England and it provides a basic overview of the procedures and steps involved in a straightforward transaction, but it should nevertheless be borne in mind that each transaction is different and must be approached as such with the benefit of legal advice.
Distinction between freehold ownership and leasehold ownership
There are two different types of legal ownership, freehold, or leasehold (there is a third which is very rare, commonhold). Most houses are freehold and all apartments/flats are leasehold.
Freehold – ownership of a house and the land in which the house is situate is outright and forever. The advantages of freehold ownership are that there will be no liability to pay an annual ground rent or service charges for the upkeep and running, and the owner will have responsibility and control for maintain the building and land and insurance. Freeholders enjoy the greatest freedom as to how they may use their property.
Leasehold – ownership of an apartment/flat is regulated by a document known as a lease and the period of ownership is limited to the number of years remaining in the lease. The lease is between the freeholder (also referred to a landlord) of a building/development in which the apartment/flat is comprised and the leaseholder (also referred to as a tenant) and the terms of the lease sets out the legal rights and responsibilities of both parties. Leaseholders are constrained in the use of their property by the terms of their lease.
The freeholder will normally be responsible for maintaining the common parts of the building in which the apartment/flat is comprised, such as the entrance hall and staircase, as well as the exterior walls and roof. Leaseholders have to pay annual maintenance fees, service charges and insurance, and ground rent to the freeholder or to its managing agents. Examples of typical restrictive provisions found in leases are requirements to obtain the freeholder’s prior authority before carrying out works and alterations to the property and renting the property to tenants Accordingly should the buyer wish to carry out alterations after its purchase of the property, or intends to rent the property to third parties, the buyer should advise its solicitor who will progress these points.
Share of freehold – this is a commonly used term particularly in marketing the sale of apartments/flats (which are leasehold), and it means that in addition to owning the leasehold of the apartment/flat, the owner will also own a share of the freehold out of which the lease of the apartment/flat has been granted together with other owners of apartments/flats in the building.
It is important to note that where an owner of an apartment/flat owns a share of the freehold they do not own a freehold flat – there will be two separate legal titles, a leasehold title of the apartment/flat and a share in the freehold title of the building. The owner of the apartment/flat will still have to comply with the obligations contained in their lease and a premium may still be payable to extend the length of the lease unless the apartment/flat owners in their capacities as freeholders decide to extend the lengths of their leases at no cost.
Generally, it is advantageous for owners of apartments/flats to also own shares in the freehold because they will be acting in their own best interests and will be able to control the running of the building and payments.
At the same time as the purchase of the property, due consideration should be given for an application to be made to the freeholder to extend the term of years of a lease, which has just over 80 unexpired years remaining. It may be possible if certain criteria can be satisfied, to extend the term of such lease by an additional 90 years commencing on the date of expiry of the lease (at no ground rent) subject to paying an agreed price, which is determined by valuers based on a method of calculation. Essentially a seller must own the apartment/flat for a period of at least 2 years (and subject to certain other criteria), in order to be entitled to apply to the freeholder to extend the term of the lease, which would mean that a buyer would be prohibited from making such an application until it has owned the property for a period of at least 2 years.
The price payable to extend the term of years of a lease with less than 80 remaining years is considerably more expensive, than the price payable for a lease with more than 80 remaining years, so it would be hugely beneficial for the buyer to agree with the seller for the seller to make the application to the freeholder after sale contracts have been exchanged (see below) and to transfer the benefit of the application to the buyer at the same time as completing the sale of the property.
Registration of property interests in England and Wales
The majority of property interests are now registered electronically at the Land Registry with unique title numbers. The registered title, now known as the ‘ official copy of title ’ will contain three registers: the Property Register will give a brief description of the land to be purchased with reference to an attached plan, the Proprietorship Register will give details of the current owner of the property and the Charges Register will provide details of all matters affecting the property, such as mortgages/financial charges, and covenants regulating the use of the property. Seller’s solicitors will always undertake to remove such mortgages/financial charges on completion of the sale, almost always by paying the required monies from the proceeds of sale.
If purchasing a leasehold property, reference to the lease will be made on the title register and a copy will usually be held electronically at the Land Registry.
Some properties are not registered at the Land Registry, but this is becoming far and few in between. Investigating title to such properties can be complicated since it is necessary to study in detail the history of the property, certainly at least for the past 15 or more years. A solicitor who acts for the buyer of an unregistered property frequently needs to study a number of historical documents. When unregistered property is purchased, the buyer’s solicitor will apply to register such property at the Land Registry with its unique reference number for the first time.
The steps involved when purchasing a property
1. The seller will most likely have instructed a selling agent to market the property, and the selling agent will throughout the sale process be acting for and representing the interests of only the seller, and not the buyer. The seller and buyer will agree the terms of the sale, which will include: the price, specific items to be included in the sale, time frame to exchange contracts and complete, and possibly a period of exclusivity for the buyer, where the seller will not market the property or deal with other potential buyers usually subject to the payment of a deposit by the buyer, which the selling agent will incorporate in a memorandum of sale and circulate to the parties and their solicitors.
2. The selling agent should also provide details of the he property which the buyer is purchasing. If a leasehold property is being purchased, it is important to see a leasehold plan so this can be compared with the leasehold plan contained within the official Land Registry compliant lease. It is not unusual to find the selling agents’ plan differing to the leasehold plan in the lease. For example, sometimes walls may been removed or the internal layout of the property changed, in which case confirmation that the Landlord’s consent was obtained would be required. If such confirmation was not obtained, the Landlord’s consent would have to be obtained retrospectively.
3. The buyer’s solicitors will write to the seller’s solicitors requesting the ‘contract papers’ and a sales package consisting of a draft contract, title papers to the property, and answers to questions about the property (including a form setting out items which will or will not be left at the property, and items for which payment will be required) which are contained in the Law Society’s proforma standard property information forms.
4. Buyers are advised to instruct a surveyor or structural engineer to carry out a survey of the property to include the value, structural integrity and condition. Commonly there are two levels of survey: a Home Buyer’s Report and a full structural survey, the latter being more comprehensive. Where a buyer is purchasing the property with the aid of mortgage finance, the lender will carry out a valuation of the property to determine whether they are obtaining adequate security for their loan, but such a valuation report will be basic and the need to obtain either a Home Buyer’s Report or a full structural survey is highly recommended.
5. On receipt of the contract papers, the buyer’s solicitor will obtain a number of searches from public and private bodies to check for any adverse results which effect the property and will review the sales package provided, the search results and the result of a survey report which the buyer or the buyer’s lender would have commissioned, and where necessary, will raise a number of specific enquiries with the seller’s solicitor.
6. If the property is being purchased with the assistance of mortgage finance, these searches are not optional as lender will insist on these being obtained. If however the property is being purchased without a mortgage, ‘a cash buyer’, it would be the buyer’s decision whether or not it wishes to obtain some or all of the searches, although it is very strongly recommend that it does because the searches will identify potential problems which may need further investigation and which may or may not be addressed. Typical searches include: a local authority search, drainage and water search, environmental search, and chancel check search together with any other searches which may be appropriate having regard to the geographic location of the particular property – for example, flooding, ground stability, underground, HS2, and Crossrail.
7. If there is a third party providing funding for the purchase; for example, a lender, the buyer’s solicitor will need to receive their instructions and list of requirements. Sometimes, a lender will want to instruct another separate, independent law firm to represent their interests.
8. The parties’ solicitors will agree the final form of sale contract including the amount of the contractual deposit to be paid by the buyer, a completion date, which can typically range from 1 week to 4 weeks or even be simultaneous and any other required specific conditions. The amount of the contractual deposit to be paid by the seller on exchange of contracts. Traditionally a deposit equivalent to 10% of the purchase price is paid, but this is no longer a hard and fast rule and a deposit of less than 10% is acceptable dependent on particular circumstances.
The purpose of the deposit in broad terms, is that in the event that the buyer fails to complete the purchase due to the buyer’s default, the seller may forfeit and keep the deposit and if the seller fails to complete due to the seller’s default, the seller must repay the deposit to the buyer (the non-defaulting party will also have other remedies available to it).
9. It is important to note that a buyer is not legally or contractually bound to purchase a property until the parties formally exchange contracts, which is usually during a telephone conversation between their respective solicitors. This is referred to as being ‘subject to contract’. This means that up to the point that contracts are exchanged, either party can withdraw from the transaction for any reason whatsoever without any obligations to the other party or consequences.
10. It is only when contracts have been formally exchanged that a legally binding contract is formed and both parties bound by the terms and conditions of the contract. Should a buyer withdraw, they will lose their deposit plus any accrued interest and also be subject to a claim for damages from the seller. Should the seller withdraw, they too may be subject to a claim for damages.
11. The length of time between exchange of contracts and completion is dependent on what the parties agree. Sometimes, parties will agree to a simultaneous exchange and completion whereby both the exchange of contracts and the completion of the transaction happen together on the same day. Between exchange of contracts and completion, the parties will have agreed the transfer document which will have been executed by the parties and will be held by their solicitors (and in the case of a buyer who is obtaining mortgage finance, the buyer’s solicitor will also be holding a mortgage deed executed by the buyer), the seller’s solicitors will set out the exact monies required to complete the transaction in a completion statement and send this to the buyer’s solicitors (If the property is a leasehold, any service charges paid in advance by the seller will be apportioned and added to the purchase price).
12. The buyer’s solicitor will prepare a financial statement showing the financial transactions in the purchase and confirming the exact amount of money required from the buyer to complete the buyer’s purchase. As a matter of prudence cleared completion funds must be in the buyer’s solicitors’ account one working day prior to completion to ensure that the buyer’s solicitor is able to transfer by bank transfer the completion monies as early as possible to the seller’s solicitors. It is worth noting that lenders tend to require at least five working days to release funds.
At this stage a draft Stamp Duty Land Tax Return completed by the buyer’s solicitor is sent to the buyer for his approval. It should be noted that the Stamp Duty Land must be paid to HMRC and the Return submitted no later than 30 days from the completion date, failing which a penalty and interest is payable.
13. On completion, the seller’s solicitor will send the transfer document executed by the seller to the buyer’s solicitor together with and other relevant documents such as guarantees, and warranties. The buyer’s solicitor will submit the Stamp Duty Land Tax Return at HMRC, pay the Stamp Duty Land Tax, and then apply to the Land Registry to register the buyer as the new owner of the property. The only document produced from the Land Registry showing the buyer as the new owner will be the official copy of title which can be obtained online from the Land Registry’s website.
14. If the buyer has obtained mortgage finance, the lender’s security will also be registered at the Land Registry the title to the property. If the buyer is a corporate entity, it will also be necessary to register any security against the buyer at the Companies House.
15. It is important that the buyer advises all utility providers and the local authority of the date they purchased the property. In the case of a leasehold property, the buyer’s solicitor will send a Notice of Transfer and often a fee to the landlord notifying them that the buyer is now the new owner of the property. This has to be done to ensure that all rent and service charge demands are addressed to the buyer and not to the previous owner.
A solicitor must at the inception of each transaction, give a prospective client a clear indication as to costs having regard to the information known at the time. If necessary, this information should be continuously reviewed and updated as the transaction progresses since factors that were not previously known may arise or simply, the transaction may become more complex and/or protracted than was originally anticipated.
In straight forward residential transactions, it is not unusual for a solicitor to quote a fixed fee as a percentage of the purchase price.
In addition to payment of the fees, a buyer will be liable for value added tax (presently 20%) as well as for any expenses or disbursements payable to third parties such as public and private bodies which have been incurred by your legal advisor on your behalf for example search fees or bank transfer fees.
It is not unusual for a solicitor to ask the client to make one or more payments on account of fees and disbursements at the outset of a transaction, this money will be held in a separate client account ledger as “money held on account of costs”. This reflects not only the fact that quite sizeable costs might need to be incurred as a transaction progresses but also that the length of time between the receipt of the original instruction to act and completion of all aspects of the purchase, can be many months.
Land Registry Fees
The Land Registry charge prescribed rates based on the purchase price of the property and the rates currently range from £20 – £455.
These can be around £400-£500.
These can range from anything around £600 – £2000 plus VAT depending on the type of survey undertaken.
Stamp Duty Land Tax (SDLT)
SDLT is a progressive tax payable on a sliding system under, which SDLT is charged at several rates according to the portion of the total consideration falling within each of several bands.
|£0 to £125,000||0% (“nil rate band”)|
|Over £125,000 to £250,000||2%|
|Over £250,000 to £925,000||5%|
|Over £925,000 to £1.5 million||10%|
|Over £1.5 million||12%|
- With effect from 1 April 2016, buyers of residential properties in addition to main residences (such as second homes anywhere else in the world, or investment properties intended to be rented) for chargeable consideration exceeding £40,000 will have to pay an additional 3% SDLT on each of the above SDLT bands. Exemptions will apply though in certain situations.
- A higher rate of SDLT of 15% applies to acquisitions of high-value residential property by what is referred to as ‘non-natural persons’ (such as companies or collective investment schemes) where the chargeable consideration exceeds £500,000. Certain reliefs from this higher rate are available, for example, if the property is bought by a company to be used for a property rental business, or property development and trading.
Instructing us – what do we require from you?
1. We will send you our letter of engagement before the transaction commences, which will detail the scope of the work which we will carry out for you together with our estimate of the costs and expenses in connection with the purchase.
2. We will require you to provide us with certain information such as: whether the property will be purchased in the name of an individual(s) or by a corporate entity, whether the property will be your main or only residence, and your lender’s details.
© Miller Rosenfalck LLP February 2017